Dive Brief:

Inflation sped up last month to the fastest pace this year, the Bureau of Labor Statistics said Thursday, as fresh data highlighted a slowdown in the job market and underscored the risks confronting the Federal Reserve as it leans toward stimulating the economy next week by cutting the main interest rate.
The Consumer Price Index rose 0.4% in August — 2.9% on an annual basis — after a 0.2% monthly gain in July, the BLS said. So-called core CPI, which excludes volatile food and energy prices, increased 3.1% on a 12-month basis. Meanwhile, 263,000 people filed for jobless benefits last week, the highest number since October 2021. 
“We are still not convinced that the economy needs to be stimulated by the Fed” at the end of a two-day meeting on Sept. 17, Ed Yardeni, president of Yardeni Research, said Thursday in a report. He noted that the economy is growing, inflation exceeds the central bank’s 2% goal and the unemployment rate is ranging at a comparatively low level.

Dive Insight:

The CPI data showed that the highest U.S. tariffs since the 1930s are pushing up prices at a faster pace across the economy.

A 0.3% gain last month in the cost of new vehicles, 1% increase for used cars and trucks, and 0.5% rise in prices for both apparel and video and audio products underscored the inflationary impact from import duties.

Prices also increased for politically touchy categories of goods and services that confront consumers on a daily basis.

Shelter, food and gasoline costs rose in August by 0.4%, 0.5% and 1.9%, respectively. The swelling cost of shelter was the biggest impulse behind the monthly gain in headline CPI, the BLS said.

“Tariffs are indeed raising the prices of imported goods, and also for some services that rely on supply chains, and that’s going to weigh on the economy,” Conference Board Chief Economist Dana Peterson said Wednesday.

“Consumers are going to spend less, and that’s going to convince businesses to not really invest much — they may even start letting people go — and so that’s where the weakness is,” Peterson said during a webcast.

Even as inflation persists above their 2% target, Fed Chair Jerome Powell and other policymakers in recent weeks have voiced concern about the cooling labor market. They have focused more in public comments on their congressional mandate to achieve full employment, reinforcing expectations of easing at their meeting next week.

Some economists say the immediate priority of policymakers should be employment rather than ensuring price stability, the other half of the Fed’s dual mandate from Congress.

“With the U.S. CPI numbers matching the consensus forecasts, the main market mover this morning is jobless claims, which came in far higher than expected,” Mohamed El-Erian, chief economic advisor at Allianz, said in a post on X.

“The overall signal from this week’s data is clear, and one I’ve stressed for some time, now increasingly echoed by others,” he said. “Inflation may still sit above the Fed’s target, but the greater risk to the economy lies in the pace and severity of labor market weakening.”

The four-week moving average of jobless claims last week increased to 240,500, the highest level since June, the Labor Department said.

The data followed a record revision of job growth during the 12 months through March. Payroll growth will probably be slashed by 911,000, or 0.6%, according to a BLS preliminary report released Tuesday.

In addition, overall U.S. hiring fell last month across the economy, and unemployment rose to 4.3%, the Labor Department said Friday.

Employers added a less-than-forecast 22,000 jobs in August, the Labor Department said, while noting in a revision that payrolls in June shrunk by 13,000 jobs in the first such decline since December 2020.

Powell said in a speech late last month that “he was very concerned about downside risks to their full employment mandate intensifying,” Peterson said, referring to central bank officials.

“Yes, these risks are intensifying, and if they want to go back to being proactive, they need to do something now in order to cushion the economy,” she said.